United States Court of Appeals,
Eleventh Circuit.
No. 95-2665.
UNITED STATES of America, Plaintiff-Appellee,
v.
Andrea A. RUFF, individually and as Trustee for the bankruptcy
estate of Central Micrographic Corporation d/b/a Hospital
Cooperative Assn., Defendant-Appellant.
Nov. 21, 1996.
Appeal from the United States District Court for the Middle
District of Florida. (No. 93-604-CIV-ORL-22), Anne C. Conway,
Judge.
Before HATCHETT, Chief Judge, ANDERSON, Circuit Judge, and WOOD*,
Senior Circuit Judge.
ANDERSON, Circuit Judge:
Defendant-appellant Andrea A. Ruff appeals the judgment of the
district court, on summary judgment, in favor of plaintiff-appellee
the United States of America in the amount of $20,000, arising from
Ruff's failure to honor an Internal Revenue Service ("IRS") levy on
property or rights to property of a delinquent taxpayer in her
possession. United States v. Andrea A. Ruff, 179 B.R. 967
(M.D.Fla.1995). Because we find that judgment was properly awarded
to the government, we affirm.
I. STATEMENT OF THE CASE
A. Facts1
The facts in this case are not in dispute. At all times
*
Honorable Harlington Wood, Senior U.S. Circuit Judge,
Seventh Circuit, sitting by designation.
1
Our statement of the facts is taken in large measure
(verbatim in considerable part) from the district court's
excellent opinion.
relevant to this controversy, Ruff served as the Chapter 7 Trustee
in the bankruptcy case In re Central Micrographic Corporation d/b/a
Hospital Cooperative Association, case no. 88-2577-BKC-6S7, filed
in the United States Bankruptcy Court for the Middle District of
Florida. During the pendency of the bankruptcy case, Harold Gene
Artrip approached Ruff and informed her that he had a prospective
buyer for the debtor's assets. On February 24, 1989, Ruff filed an
application with the bankruptcy court to employ Artrip as a
business broker for the bankruptcy estate, under which he would
receive a 10% commission to be shared by Artrip and two other
brokers previously employed by the estate. On March 2, 1989, the
bankruptcy court entered an order granting that application. The
order stated that the commission would be paid "only if his
prospect is the successful buyer of the debtor's business, in which
case any awarded broker commission would be shared equally" with
the two other brokers. The order also stated that payment of the
commission was subject to final approval by the bankruptcy court.
On April 17 and 18, 1989, Ruff, on behalf of the bankruptcy
estate, entered into an Agreement of Sale and Purchase of Real and
Personal Property with the prospective purchasers identified by
Artrip. The agreement was signed by Ruff, as trustee for the
estate, by the purchasers, and by NCNB National Bank of Florida,
which held liens on the debtor's assets. The property thus sold
was that property for which Ruff had employed Artrip as a business
broker. On April 26, 1989, Artrip filed an Application for
Allowance of Broker's Fee for Broker for the Trustee. The parties
agree that at the time he filed this application, Artrip had
completed all of the services for which he was hired pursuant to
the bankruptcy court's March 2 order. Artrip sought $20,000, which
represented one-third of the broker's fee derived from the sale of
the bankruptcy estate's assets, consistent with the March 2 order.
He noted in the application that if the sale to his prospects were
not consummated, he was not entitled to the commission. On May 24,
1989, the bankruptcy court authorized the sale contemplated by the
April 17 and 18 agreement. The closing of that sale occurred on
June 16, 1989.
On July 13, 1989, the bankruptcy court entered a Notice of
Hearing, setting August 3, 1989, as the date for the hearing on
Artrip's fee application. Ruff received this notice before July
27, 1989. Prior to the events discussed above, the IRS assessed a
federal tax liability against Artrip, pursuant to 26 U.S.C. § 6672.
On July 27, 1989, the IRS served on Ruff a Notice of Levy for
Artrip's outstanding tax liabilities, which the Service indicated
exceeded $230,000. The levy sought,
[a]ll property, rights to property, money, credits, and bank
deposits now in your possession and belonging to this taxpayer
(or for which you are obligated), and all money or obligations
you owe this taxpayer....
Ruff indicated on the reverse of the Notice of Levy that she held
no funds due Artrip. In response to the question on that same form
asking when Ruff would next owe Artrip money, Ruff wrote "unknown."
On the day that Ruff received the Notice of Levy, she possessed, as
Trustee in the Central Micrographics case, funds sufficient to pay
Artrip's commission.
On August 10, 1989, the bankruptcy court entered an order
granting Artrip's application for fees in the amount of $20,000,
thus authorizing payment thereof. On August 11, Ruff, acting as
Trustee for the bankruptcy estate, executed a check payable to
Artrip in the amount of $20,000 for his share of the commission
derived from the sale of the assets of Central Micrographics.
B. Issue on appeal
26 U.S.C. § 6332(a) requires that "any person in possession of
(or obligated with respect to) property or rights to property
subject to levy upon which a levy has been made shall, upon demand
of the Secretary, surrender such property or rights to property" to
the Secretary. 26 U.S.C. § 6332(d)(1) provides that any person who
fails to surrender property subject to levy shall be held
personally liable for the value of the property not surrendered.
The sole issue in this case is whether Ruff was "in possession of
(or obligated with respect to) property or rights to property
subject to levy," meaning in this case any property or rights to
property belonging to Artrip, at the time she received the Notice
of Levy from the IRS on July 27, 1989.
II. ANALYSIS
A. Standard of review
We review the district court's grant of summary judgment de
novo, Hutton v. Strickland, 919 F.2d 1531, 1536 (11th Cir.1990),
viewing the facts in the light most favorable to the non-movant.
N.A.A.C.P. v. Hunt, 891 F.2d 1555, 1559-60 (11th Cir.1990).
B. Discussion
The IRS is empowered to levy on the property or rights to
property of a delinquent taxpayer in the hands of a third party
pursuant to 26 U.S.C. § 6331(a). The levy itself does not
determine whether the government's claim is superior to those of
other claimants. Instead, the levy power is designed to enable the
government "promptly to secure its revenues" while competing claims
are resolved. United States v. National Bank of Commerce, 472 U.S.
713, 721, 728, 105 S.Ct. 2919, 2924, 2928, 86 L.Ed.2d 565 (1985).
Upon receipt of a notice of levy, such third parties are required
to surrender that property to the IRS. 26 U.S.C. § 6332(a). The
notice of levy "gives the IRS the right to all property levied upon
... and creates a custodial relationship between the person holding
the property and the IRS so that the property comes into
constructive possession of the Government." National Bank of
Commerce, 472 U.S. at 720, 105 S.Ct. at 2924. Those individuals
who fail to honor the Service's levy incur liability to the
government equal to the full value of the property not surrendered.
26 U.S.C. § 6332(d)(1); United States v. Metropolitan Life Ins.,
874 F.2d 1497, 1499 (11th Cir.1989).
A third party may raise only two defenses to excuse its
failure to surrender levied property to the government. First, it
can show that it was not, pursuant to the language in 26 U.S.C. §
6332(a), "in possession of" any of the delinquent taxpayer's
property or rights to property at the time that it received the
notice of levy. National Bank of Commerce, 472 U.S. at 722, 105
S.Ct. at 2925; Metropolitan Life, 874 F.2d at 1499. Second, it
can show that when it received the notice of levy, the property in
question was subject to attachment or execution under judicial
process. National Bank of Commerce, 472 U.S. at 722, 105 S.Ct. at
2925; Metropolitan Life, 874 F.2d at 1499. Ruff raises only the
first of these defenses.
Ruff argues that she was not "in possession of" any of
Artrip's property or rights to property on July 27, 1989, the day
on which she received the Notice of Levy. In order to determine if
Ruff was in possession of Artrip's property, specifically the
$20,000 commission he eventually received as compensation for his
services as a business broker in the Central Micrographics sale, we
employ a two-step analysis.
A court assessing a levy on a taxpayer's intangible interest
in property held by third parties must determine first the
nature of the taxpayer's interest in the property. This is a
question of state law.... Once the court has determined that
a delinquent taxpayer has rights to property, federal law
determines whether the custodian of the property is obligated
to surrender the property to the IRS.
Metropolitan Life, 874 F.2d at 1500 (citing National Bank of
Commerce, 472 U.S. at 724 n. 8, 105 S.Ct. at 2926 n. 8).
1. Artrip's right to property under Florida law
Under Florida law, a property has been sold, for the purpose
of establishing entitlement to a commission, once the purchaser
executes a binding contract to purchase the property at issue.
Hagans Co. v. Manla, 534 So.2d 750, 751 (Fla. 3d DCA 1988).
However, the broker and the party responsible for payment of the
commission may record in the broker's commission agreement express
conditions precedent to the broker's entitlement to that
commission, and these conditions must be met before the broker is
legally entitled to payment. Id. at 751-52; Harding Realty, Inc.
v. Turnberry Towers Corp., 436 So.2d 983, 984 (Fla. 3d DCA 1983).
Significantly, there is a distinction under Florida law between a
condition precedent to the entitlement to a commission and a
condition precedent to the payment of a commission. See Harding
Realty, 436 So.2d at 984 (broker was not entitled to commission
because commission agreement "expresse[d] that entitlement to the
commission, as opposed to just payment of the commission, [was] to
occur at closing," and closing never occurred).
On April 17 and 18, 1989, Ruff, on behalf of the bankruptcy
estate, entered into a binding contract of sale for the assets of
the estate to the prospect identified by Artrip. The sale was
approved by the bankruptcy court, and was consummated. However,
Ruff argues that Artrip's appointment by the bankruptcy court as a
business broker and the commission agreement were subject to an
express condition precedent to his entitlement to the commission.
That order states:
[A] fee will only be paid upon application, general notice and
approval of the Bankruptcy Court.
In re Central Micrographic Corp., No. 88-2577-BKC-6S7
(Bankr.M.D.Fla. March 2, 1989) (Order appointing Artrip business
broker). Ruff argues that Artrip was not entitled to those fees
until the bankruptcy court gave its final approval, which occurred
on August 10, 1989.
As noted above, there is a difference under Florida law
between entitlement to a commission and payment of a commission.
The broker in Harding Realty was denied his commission because the
commission agreement specifically stated that entitlement to the
commission would occur at closing, and the buyers never closed on
the properties. Harding Realty, 436 So.2d at 984. In this case,
Artrip's commission was agreed upon and approved on March 2, 1989,
by the bankruptcy court. Under that order, Artrip was entitled to
the commission if his prospect was the successful buyer of the
property, which was in fact the case. It is true that the order
also stated that Artrip's commission would be "paid" only upon
subsequent application to and approval by the bankruptcy court.
The court's order conditioned payment, not entitlement, upon
further approval. Under Florida law, the condition as to payment
did not undermine Artrip's entitlement. Thus, Artrip was entitled
to payment, at the latest, when the sale of the property was
consummated pursuant to the April 17 and 18, 1989, contract for
sale. Hagans Co., 534 So.2d at 751. The district court properly
concluded that, under Florida law, Artrip had an entitlement, and
thus had a property interest in the commission.
2. Ruff's obligation to surrender Artrip's commission to the IRS
Once it is determined that a state law property interest
exists, Federal law determines the tax consequences of that
interest. National Bank of Commerce, 472 U.S. at 722, 105 S.Ct. at
2925. State law is not relevant to this inquiry. Id. Federal
law, specifically the Treasury regulations governing the levy
power, establishes the nature of this determination.
[A] levy extends only to property possessed and obligations
which exist at the time of the levy. Obligations exist when
the liability of the obligor is fixed and determinable
although the right to receive payment thereof may be deferred
until a later date.
26 C.F.R. § 301.6331-1(a)(1). The issue of whether Ruff was
obligated to surrender Artrip's commission to the IRS is really a
question of whether the liability of the bankruptcy estate to
Artrip was "fixed and determinable" at the time that the Notice of
Levy was served on Ruff. United States v. Hemmen, 51 F.3d 883, 888
(9th Cir.1995).
At the outset, it is important to note that the quoted
regulations include among obligations which are "fixed and
determinable" those obligations for which the right to receive
payment has been deferred. Thus, an obligation can be fixed and
determinable even if the right to receive payment does not arise
until a later time. The court in Hemmen analogized a fixed and
determinable obligation of this type to "an ordinary contract with
an executory duty to pay for a completed performance by the
obligee." Id. at 890.
The situation confronted by the court in Hemmen is very
similar to that in the case at bar. In Hemmen, the president of a
Chapter 11 debtor, Al-Hadid (hereinafter referred to as taxpayer)
performed certain services for the estate by working to preserve
the assets of the estate. He filed a claim with the bankruptcy
court for administrative expenses. The case was converted into a
Chapter 7 liquidation, and Hemmen was appointed trustee. Id. at
886. The district court entered two separate orders allowing the
taxpayer's claim for administrative expenses. The second of these
orders, dated October 16, 1984, indicated that payment would not be
made "except upon further order of the court." Id. The underlying
performance by the taxpayer was complete at all relevant times.
Approximately one year before the issuance of these orders, the IRS
assessed a civil tax penalty against the taxpayer. Pursuant to
that assessment, on December 17, 1985, after allowance of the claim
for administrative expenses but before the bankruptcy court had
finally approved payment thereof, IRS agents served a notice of
levy on Hemmen demanding the surrender of any of the taxpayer's
property or rights to property in Hemmen's possession as a result
of his status as trustee. Id. However, instead of surrendering
the money owed by the estate to the taxpayer, Hemmen paid those
funds to the taxpayer. The IRS sued Hemmen, arguing that he was
personally liable for the funds paid to the taxpayer.
The court in Hemmen held that the allowed administrative
expenses were fixed and determinable as of the date on which the
Secretary's notice of levy was served. It reached this conclusion
despite the fact that actual payment of those expenses by the
trustee had to await authorization from the bankruptcy court, and
the fact that the claims for expenses could be reduced to money
only if there were sufficient assets left in the estate to satisfy
them. Id. at 890. Additionally, the court noted that the trustee
retained the power to move the bankruptcy court to disallow the
claims. Id. These factors failed to sway the court.
None of these conditions to payment, however, undermines the
proposition that the obligation of the estate to [the
taxpayer] was "fixed" within the meaning of § 301.6331-1(a)(1)
after the underlying performance was completed and the claim
was allowed by the court.... At best, the factors Hemmen
cites establish only that the estate's liability was fixed but
that [the taxpayer's] interest was still subject to possible
defeasance due to factors having no bearing on the underlying
performance.
Id. Further, the court held that the sum due the taxpayer was
determinable because, although there was some uncertainty as to
whether there would be sufficient funds remaining in the estate to
pay the taxpayer's claims, the sums were still capable of precise
measurement in the future. Id. (citing Reiling v. United States,
77-1 U.S. Tax Cas. (CCH) P9269, 1977 WL 1094 (N.D.Ind.1977)).
Thus, according to the Hemmen court, the administrative expenses
due the taxpayer were fixed and determinable because they had been
allowed by the bankruptcy court and the underlying performance had
been completed. The fact that payment might not be made due to a
shortfall in the estate or subsequent disallowance by the
bankruptcy court had no impact on the Hemmen court's determination
that they were fixed and determinable as of the date of the levy.
Similarly, Artrip's commission was fixed and determinable on
July 27, 1989, the date that Ruff received the Secretary's Notice
of Levy.2 It was fixed because the bankruptcy court in its March
2
Ruff argues that the facts of this case are more similar to
those found in Tull v. United States, 69 F.3d 394 (9th Cir.1995),
and that therefore we should adopt the logic of that case.
However, Tull is entirely consistent with the reasoning of
Hemmen, and is distinguishable on its facts from both Hemmen and
the case at bar. In Tull, the IRS served a notice of levy on the
Secretary/Treasurer of a corporation with significant outstanding
tax liabilities, including both payroll withholding and trust
fund liabilities. At the time, the corporation was experiencing
financial difficulties, and sought to auction off some of its
equipment. The IRS served the notice prior to the auction, but
after a contract to auction the property had been made between
the corporation and an auction house. Id. at 395. The court
held that the property of the corporation, in this case the right
to the proceeds of the auction, was not fixed and determinable on
the date of the levy. Id. at 397. It noted that the actual
property to be sold had not been finally set as of the date of
the levy, nor had a buyer come forward to purchase that property.
Thus, the auction house "had an obligation to attempt to sell
some as yet undetermined amount of property for an as yet
undetermined price to as yet undetermined buyers." Id. The
court reasoned, however, that "[a]n actual sale of property would
establish both the price of that property and the duty of the
buyer to pay the price, even if the date of payment were
deferred." Id. at 398.
The court in Tull noted that the situation in Hemmen
was quite different. In Hemmen, "the performance of the
taxpayer had been completed and the amount he was owed for
that performance had been determined, subject to a possible
later defeasance in whole or part if funds were not
available." Tull, 69 F.3d at 398. The situation in the
instant case and in Hemmen are quite different from that in
2, 1989, order approved Artrip's appointment as broker for the
estate with a 10% commission (to be shared equally with two other
brokers), and because the underlying performance required of Artrip
was complete. The buyer identified by Artrip entered into an
agreement with Ruff to purchase those assets in April of 1989, and
the sale was authorized by the bankruptcy court on May 24, 1989.
The closing occurred on June 16, 1989. The commission was
determinable because it was capable of precise measurement, having
been established by previous court order. See In re Central
Micrographics Corp., No. 88-BKC-6S7 (Bankr.M.D.Fla. March 2, 1989)
(Order appointing Artrip business broker). The bankruptcy court
set a date for Artrip's fee hearing by notice to the parties almost
two weeks before Ruff received the Notice of Levy. The fact that
Artrip was entitled to a commission of $20,000 was never in
dispute, and this is unaffected by the potential unavailability
within the bankruptcy estate of the resources needed to pay that
amount. Common sense dictates that the Treasury regulations at
issue here be read this way.3 If the regulations were meant to
Tull. Here, as of the date of the levy, the sale was
complete, and thus the underlying performance required of
Artrip was complete. The amount of the commission due was
firmly established, having been set by previous court order.
The possibility of "later defeasance," as in Hemmen, has an
impact on the fixed and determinable nature of the
commission due Artrip.
3
This common sense reading of 26 C.F.R. 301.6331-1(a)(1) is
consistent with that found in cases interpreting other parts of
the Treasury regulations governing the Service's levy power. In
In re Quakertown Shopping Center, Inc., 366 F.2d 95 (3rd
Cir.1966), the court, interpreting section 301.6331-1(a)(3), held
valid and enforceable a levy served on a receiver in bankruptcy
against any property or rights to property due a creditor of the
estate. The levy sought to secure assessed tax liabilities of
the creditor. As of the date of the levy, however, the creditor
require, as Ruff argues, that the commission must be paid to the
broker before it can be fixed and determinable, then they would
have been written to so require.
Our holding is consistent with the purpose of the levy. The
levy is not designed, as noted above, to give the government's
claims superiority over the claims of others. Instead, the levy is
intended only to protect the government's statutory interest in
"property or rights to property," see 26 U.S.C. § 6332(a), and to
assure the availability of the assets at issue once a final
ordering of claims is made. National Bank of Commerce, 472 U.S. at
721, 728, 105 S.Ct. at 2924-25, 2928. The resolutions reached in
Hemmen and in the case at bar merely insure that this interest is
protected by putting the burden of monitoring the progress of the
bankruptcy estate on the party who can most easily and efficiently
carry it, the trustee.
The interpretation of the statute urged upon us by Ruff would
read out of the statute the phrase "rights to property," and thus
would strictly limit an IRS levy to "property" actually in the
possession of the party upon whom the levy is served. Ruff's
interpretation is also inconsistent with the regulations, and would
had only filed a claim against the bankruptcy estate, but the
bankruptcy court had not yet allowed the claim. The court
reasoned that the levy in this instance operated like an
involuntary assignment of the creditor's claim against the estate
to the United States. Id. at 98. Because the creditor was free
to make a voluntary assignment of his claim without the
permission of the bankruptcy court, the court found that it was
similarly free to transfer its claim in this instance, albeit
involuntarily. Thus, the receiver did have in his possession
property of the taxpayer, namely the claim against the estate,
and the levy validly functioned to transfer that property to the
United States. Id.
eliminate from the property subject to levy "obligations which
exist at the time of the levy." 26 C.F.R. § 301.6331-1(a)(1). It
would render superfluous the regulation's elaboration to the effect
that those obligations upon which levy may be made are those which
are "fixed and determinable" although the right to receive payment
thereof may be deferred. Ruff's interpretation would seriously
undermine the Service's ability to protect the government's
statutory interest.
Analysis of the relevant bankruptcy provisions governing the
payment of professionals from the assets of the estate reinforces
our conclusion that Artrip's commission was fixed and determinable
as of the date of the levy. Section 328 of the Bankruptcy Code
states:
(a) The trustee ..., with the court's approval, may employ ...
a professional person ... on any reasonable terms and
conditions of employment, including on a retainer, on an
hourly basis, or on a contingent fee basis. Notwithstanding
such terms and conditions, the court may allow compensation
different from the compensation provided under such terms and
conditions after the conclusion of such employment, if such
terms and conditions prove to have been improvident in light
of developments not capable of being anticipated at the time
of the fixing of such terms and conditions.
* * * * * *
(c) [Subject to exceptions not relevant here], the court may
deny allowance of compensation for services and reimbursement
of expenses of a professional person employed under section
327 ... if at any time during such professional person's
employment ... such professional person is not a disinterested
person, or represents or holds an interest adverse to the
interest of the estate with respect to the matter on which
such professional person is employed.
11 U.S.C. § 328 (emphasis added).
The bankruptcy court in this case approved Artrip's fee
arrangement, including the provision setting his commission
percentage, on March 2, 1989, well before the Secretary served the
Notice of Levy on Ruff. Because Artrip's prospect was the ultimate
purchaser of the Central Micrographics property, and because the
sale had been consummated, he had completed the tasks required of
him to establish his entitlement to that commission as of the date
of the levy. Section 328 significantly curtails the bankruptcy
court's discretion with respect to the final payment of previously
approved fees to professionals.
The bankruptcy court's power to alter the fee arrangement in
no way diminishes the fixed and determinable nature of Artrip's
commission arrangement, which was approved by the bankruptcy court
on March 2, 1989. The district court noted that there were no
facts upon which the bankruptcy court could have based a decision
to reduce or eliminate Artrip's commission. Ruff, 179 B.R. at 972.
There was no evidence that Artrip was no longer a disinterested
person, nor that the bankruptcy court felt that the fee arrangement
was improvident. The fact that the court scheduled a hearing on
the fee indicates that there was money left in the estate with
which to pay it. Thus, the district court concluded that Ruff
could not have seriously questioned whether Artrip would receive
his fee at the time that she received the Notice of Levy. Id.
III. CONCLUSION
We conclude that Ruff was, within the meaning of 26 U.S.C. §
6332(a), "in possession of ... property or rights to property
subject to levy" on July 27, 1989, the date on which she received
the Secretary's notice of levy for Artrip's outstanding tax
liabilities. She was therefore required to surrender that property
or the rights thereto to the Secretary. She did not do so, and,
pursuant to 26 U.S.C. § 6332(d)(1), is therefore personally liable
to the Secretary for the value of the property not surrendered, in
this case $20,000. We affirm the ruling of the district court.
AFFIRMED.4
4
We agree with the district court that the bankruptcy court
case of In re Ceafco, 28 700, 1977 WL 1273 (S.D.Ala.Dist.Tax
Sept. 21, 1977), was wrongly decided. Ceafco involved facts
almost identical to Hemmen, in that the IRS served a levy upon
the trustee in bankruptcy seeking property of a taxpayer whose
claims for administrative expenses had been allowed. The
bankruptcy court judge reasoned that only the bankruptcy court
had the authority to determine how the assets of the bankruptcy
estate were to be distributed, and because that determination had
not yet been made, the trustee held no right to property
belonging to the taxpayer, and therefore the levy was premature.
The Ceafco court overlooked the fact that an IRS levy does not
determine that the government's claim is superior to that of
other claimants. National Bank of Commerce, 472 U.S. at 721,
728, 105 S.Ct. at 2924-25, 2928. Thus, the levy does not
interfere with a bankruptcy court's determination of how the
assets of the estate are to be distributed.